Consumer spending is about 70% of GDP. When consumers are expected to buy, businesses expand. That process ads to GDP. When consumers are not expected to buy, businesses do not expand. Consumer loans spur consumer buying. When consumers get overstretched, they reduce their buying. That reduces economic activity, thus slowing GDP growth. The current expansion was held back by negative EE, e.g., see Calculated Risk equity extraction graph.

David, most businesses do not start by borrowing; they start from equity (though the equity may be borrowed from a family member or such). I was not referring therefore to startups. I was looking largely at bank credit, mortgages and other consumer borrowings, such as credit cards. For example, most mortgage loans made in 2002 performed well; those made in 2006 did not. I think we would find similar contrasts for the other categories. And I think we will see that consumer loans made in 2010 will perform better than consumer loans made in 2015, which probably will be closer to the end of the current cycle--perhaps even closer to the end in part because credit has been loosened.

I also meant to invite discussion of how capital markets may loosen credit even when banks are not doing so. E.g., high yield debt.

It also is possible that the credit advanced near the bottom of the cycle performs better because it is more constrained.

Experience shows that credit advanced at the bottom of the cycle performs well, while credit advanced at the top performs badly or at least less well. Yet credit conditions almost always contract when times are bad and loosen when times are good (as is happening recently), thus reenforcing or maybe even causing the credit cycle and the over investment that leads to eventual contraction.One can see why this would be a natural psychological reaction on the part of lenders. But professionals ought to know better. Or is it not the professionals that do it? Puzzling.

Not Every Bad Thing Is A Bubble: A View On 2015 And Thereafter [View article]

Nice piece, Jim, thanks.I am worrying about the impact of low oil prices on international trade. Oil exporters are importers of other stuff. If they have less money, and if their bonds look dicey so they cannot get more credit (and this could happen to many oil producers) the exporting nations may have a hard time. That will affect the U.S. less than others, but I think it could lead to lower equity prices even for U.S. companies that are, after all, usually global in terms of sales.I do not yet have the data to know whether my worries are well grounded, and there is less writing on these possibilities than I would expect. (Gillian Tett had a good article in the FT earlier this week, as far as it went.)

The Fed To Release $600bn Of Treasuries Into The Reverse Repo Market At Year-End [View article]

Excellent commentary, thank you. One of the (many) things I have been puzzling over lately is what caused the brief excellent performance of the labor market in 1996-99. Your data show how good it was comparatively and data on the returns to skill also were excellent in those years. Do you have a hypothesis?

Would You Prefer Banks Riskier Or More Highly Leveraged? A False Dichotomy [View article]

That is all theory, Sleek, just as Admati and Hellwig is all theory. What we need is a study of historical data that looks at banks with varying capital levels and seeks to find their relative costs of capital. Such a study is hard to design, however, because risk profiles are difficult to quantify.

Would You Prefer Banks Riskier Or More Highly Leveraged? A False Dichotomy [View article]

Would You Prefer Banks Riskier Or More Highly Leveraged? A False Dichotomy [View article]

The article you cite raises the right issues. But I do not see that it convincingly shows that lending costs would be higher. I do think that 30% capital (which is what the article discusses) borders on the silly, even though there are those in Congress and academia who advocate such a level.

It may be that if capital has to be 10% of total liabilities, there is some impact on loan rates. But I wonder whether it would be material to most borrowers. You might try to hypothesize the types of borrowers that would be affected. Not credit card borrowers, I think. Not home loan borrowers, I think. Maybe some business borrowers, perhaps. But what is, say, 25 bp to them?

i think the 125 bp hypothesized by the article at 30% is way high anyway because the market will lend at lower rates. Look at the brief history of the P to P market. I think it shows how competition in lending now works. Banks are not alone.

Would You Prefer Banks Riskier Or More Highly Leveraged? A False Dichotomy [View article]

Banks now account for about 20% of credit in the U.S. There are many competitors for borrowers. I have seen no convincing studies that say lower bank leverage means higher borrowing costs. it could be true. But please do not assume it. There are many theoretical reasons that it might not be true.